As I noted in my first Shale piece, the much ballyhooed “agreement in principle” from the summer to pass a gas tax by a date certain – one now a fortnight in the rearview – fell apart because it lacked principle.

More than that, it certainly lacked agreement. When parties announce “agreements in principle,” it means more than “we both want the dough.” It means – in the real world – that the parties have settled on the general terms and all that remains are minor points that will not stand in the way. Issues like how much to tax, when to tax, what to tax, and how to spend are hardly such minor details.

This initial failure to act does not have to prove fatal to passage of a rational severance tax – but the “what” and the “how” must be transparently debated to avoid the creation of a severance tax whose revenue is squandered.

A bad severance expenditure policy leaves yet another unfunded future liability for generations to come – a result that would ensue if the revenues generated are simply used to fill in the short-term deficits created by a lack of fiscal discipline in Harrisburg for far too long (seriously, reduce staff sizes – every private company has had to). The levying of any tax on the shale should account for the generational nature of the resource and the costs it will leave behind.

In broadest terms, I propose splitting the revenue into four uses: 1) capital improvements (with an over emphasis on areas directly impacted by drilling); 2) a water treatment improvement fund; 3) a decommissioning/contingency fund; and 4) a rainy-day fund.

A. The Infrastructure Fund.

The improvement of the roads and bridges has obvious, direct and indirect benefits to both the Marcellus industry — better roads and improved infrastructure will make the development more accessible and safe, both for the equipment and the employees needed to service that equipment — and to the Commonwealth at large. Without such a fund, the overwhelming public costs of the development of the Marcellus play will fall on average taxpayers, as state revenues will have to be utilized to repair infrastructure pushed to the failing point by the sudden influx of so much heavy equipment and trucking. Over time, properly funded and managed, the revenue from a severance tax can ensure that these costs are appropriately captured in the development of the Marcellus.

B. The Wastewater Fund.

The fact is we have a lot to do to repair and maintain the quality of our water resources – resources that fuel critical industries like agriculture and tourism in addition to natural gas, and energy production. Using revenues from the Marcellus severance tax to repair and upgrade these facilities will 1) improve water quality for all Pennsylvanians, including thousands of Marcellus workers; 2) make more water resources available for use in the Shale play; and 3) offset a looming general fund cost, freeing up money for other things

The price tag to upgrade our wastewater systems is in the billions of dollars. The strain of an inadvertent or intentional release of Marcellus frac water into a system could do tremendous damage. A proactive severance tax for wastewater upgrades could provide for the treatment of frac water, ensuring that vital industries like tourism do not suffer because of contaminated trout streams, for example.

C. The Catastrophic loss/ Decommissioning fund.

This pool should be funded more aggressively early, capped at a reasonable number, and only added to if drained after that point – with the express condition that the cap number be pegged to an index so that the full interest is not siphoned off to the general fund.

This fund accomplishes two fundamental moral obligations: 1) it protects current taxpayers from the burden of a catastrophic event; and 2) it protects the interest of the generations who will have to deal with the impacts if we get it wrong.

I do not speak idly when I call these moral obligations — it is evident from the scars of the past that we do. This is a generational resource, one whose use and development must be done responsibly in such a manner to ensure a better future for the citizens of the Commonwealth.

D. And if there’s anything still leftover…

The other three funds are established with the idea that a set number, adjusted for inflation, will be sent to each fund each year based on its purpose — a dollar figure (if available) that, once met, means that there is extra dough for the kitty.

Dumping the rest of the rainy-day money is an invitation to raid the account annually by the legislature. And frankly that is by design. The fact is there is no way that the gang in Harrisburg will not find ways to siphon funds into pet projects and new initiatives. However, by first directing it to the rainy-day fund, we can force the legislature to at least acknowledge that it is taking money set aside for an important future beneficiary of our Commonwealth’s “common wealth,” a step in the process that might encourage some restraint.

Four simple funds, four connected purposes. The severance tax as contemplated here is a rational and natural part of an undertaking that will, by definition have externalities that must be borne by the public at large. The establishment of these funds, with benefits directed at the precise areas most impacted by the development of the play, is causally linked to the industry and benefits its growth, both directly and indirectly.

Scott Paterno is an accomplished policy analyst and political consultant based in Hershey, PA. Mr. Paterno, never one to sit still, has practiced law, run for a house seat, and worked as lobbyist in Harrisburg and Washington. Paterno is Vice Chairman of the Sustainable Energy Fund and is currently pursuing a master’s degree in Political Science. He is happily married with three children. - Email scottp